Interchange fees are charged by a cardholder's bank (the issuing bank)
to a merchant's bank (the acquiring bank) for each sales transaction at a
merchant outlet with a payment card.

Interchange fees are either agreed bilaterally, between issuing and acquiring
banks, or multilaterally, by means of a decision binding all banks participating
in a payment card scheme. Industry refers to these multilateral interchange fees
as "MIF". A MIF can be a percentage, a flat fee or a combined fee
(percentage and flat fee).

When a cardholder uses a payment card to buy from a merchant, the merchant
receives from the acquiring bank the retail price less a merchant service
charge, a large part of which is determined by the interchange fee. This
merchant service charge is the price a merchant must pay to his bank for
accepting cards as means of payment. The issuing bank, in turn, pays the
acquiring bank the retail price minus the MIF. The retail price is deducted from
the bank account of its customer.

ISSUING BANK

PLATFORM

MIFACQUIRING
BANKCARDHOLDERMERCHANT

Merchant fee

Cardholder FeeMIFNetwork
feeNetwork fee

[ Figures and graphics available in PDF and WORD PROCESSED ]

Interchange fees are one of the sources of revenue for issuing banks from
payment cards (others include annual fees, interests for the use of a credit
facility, late payment fees, currency exchange fees, etc.).

Which interchange fees are subject to the Commission's decision?

The Commission's decision addresses one specific multilateral interchange fee
(MIF) within the MasterCard payment card organisation. This MIF, called
"intra-EEA fallback interchange fee", applies to virtually all cross-border card
payments with MasterCard and Maestro branded payment cards and to domestic
payments in several European Economic Area (EEA) Member States. The decision
prohibits this MIF as far as it regards consumer credit and debit cards but not
as far as it regards commercial (e.g. corporate) cards.

This MIF applies as "fallback", that is, when no other interchange fee has
been agreed bilaterally between issuing and acquiring bank. In practice,
virtually all cross-border payments with MasterCard or Maestro branded payment
cards between Member States of the European Economic Area are subject to
MasterCard's intra-EEA fallback interchange fees. Moreover, the fees also apply
to domestic credit card transactions within eight Member States of the
European Economic Area (Belgium, Ireland, Italy, the Czech Republic, Latvia,
Luxembourg, Malta and Greece) and to domestic debit card payments within Greece
and the Czech Republic. The economic importance of MasterCard's intra-EEA
fallback interchange fees is therefore considerable.

MasterCard's MIF is a mechanism that restricts price competition between
acquiring banks by artificially inflating the basis on which these banks set
their charges to merchants. A MIF effectively determines a floor under the
merchant service charge and merchants are unable to negotiate a price below it.
This can considerably inflate the costs of payment card usage at merchant
outlets to the detriment of merchants and their customers. For instance, the
Commission estimates that MasterCard's MIF accounted for more than 70% of the
merchant service charges for credit cards in Belgium (2002) and for
approximately 60% of these charges in Italy (2003).

If MasterCard operated without a MIF, merchants would pay lower prices for
accepting cards and, as a consequence, their customers should also incur lower
costs for shopping at a merchant's.

Why does MasterCard's MIF not fulfil the exemption provided by Article 81
(3) of the EC Treaty?

There is no single decisive criterion for assessing whether a MIF is designed
in a way as to promote progress and pass on a substantial share of the benefits
achieved to consumers. Rather, the existence of objective appreciable
efficiencies is appreciated with respect to the arguments and the evidence
brought forward by the parties. In MasterCard's case, the Commission in
particular verified whether the model underlying MasterCard's MIF was founded on
realistic assumptions, whether the methodology used to implement that model
could be considered objective and reasonable and whether the MIF had indeed led
to the positive effects that MasterCard claims.

In principle, the Commission does not dispute that payment systems can be
characterised by indirect network externalities and, in theory, interchange fees
could help optimising the utility of a card network to all of its users.
However, the concrete model underlying MasterCard's MIF operates with
unrealistic assumptions and MasterCard failed to submit empirical evidence to
demonstrate any positive effects of its MIF on the market.

MasterCard's MIF is a subsidy to its member banks and burdens the acquiring
party with costs, thereby rendering payment card acceptance artificially more
expensive. Due to the lack of empirical evidence submitted by MasterCard, the
Commission was not in a position to balance these negative effects of the MIF
with possible objective efficiencies. The Commission therefore concluded that
MasterCard's MIF does not fulfil the first condition of Article 81 (3) of the EC
Treaty.

As to the second condition of Article 81 (3) of the EC Treaty, consumers must
get a fair share of the benefits resulting from a MIF.

There is no reason to simply assume from the outset that a MIF would
increase the utility of the payment card system to both cardholders and
merchants alike. The Commission attributes particular importance to the question
whether in setting a MIF a scheme uses a methodology that guarantees from
the outset that both cardholders and merchants obtain a fair share of the
benefits. MasterCard in practice sets the level of its MIF using cost
benchmarks. These benchmarks are, however, largely arbitrary and inflated.
Hence, without further evidence - which MasterCard failed to submit - it cannot
safely be assumed that by pursuing its member banks' aim of maximising sales
volumes MasterCard's MIF has created efficiencies that benefit all
customers, including merchants. The Commission therefore found that MasterCard's
MIF does not fulfil the second condition of Article 81 (3) of the EC Treaty.

Finally, MasterCard did not provide any empirical evidence on the actual
effect of this MIF in the market although ECB statistics indicate that card
schemes without a MIF display the highest card usage per capita in the EU.

MasterCard has therefore not proven to the requisite standard that its MIF is
indispensable to achieve a maximised system output or any claimed related
efficiencies.

What was the duration of the infringement?

The infringement lasted over 15 years, from 22 May 1992, when Europay
International S.A. (now: MasterCard Europe S.p.r.l) submitted its first
notification of the scheme to the Commission until the adoption of the
Commission's decision, on 19 December 2007.

Why is MasterCard's MIF only prohibited now?

Since 1992 the Commission has been investigating not only MasterCard's MIF
but also various other network rules and arrangements within the organisation
which were addressed one after the other and which also raised competition
concerns.

MasterCard started notifying its network rules on 22 May 1992 and submitted
its last notification on 23 May 1997. The Commission formally opened proceedings
with respect to these network rules in 1999. MasterCard subsequently modified
some of these network rules to allow for more cross-border competition between
its member banks. In 2002 the Commission opened an 'ex officio'
investigation into MasterCard's MIF for commercial cards and on
24 September 2003 it sent MasterCard a second Statement of Objections,
addressing the MIF. On 21 June 2006 the Commission sent MasterCard a second
Statement of Objections (see MEMO/06/260).

In parallel, the Commission also investigated Visa's network rules and in
particular Visa's MIF and adopted a formal decision on 24 July 2002 (see also
below questions on the Visa decision). During 2005 and 2006 the Commission
moreover screened the entire payment cards industry in the framework of its
competition sector inquiry into retail banking.

Has the IPO of MasterCard Inc. influenced the Commission's assessment
under Article 81(1) of the EC Treaty?

No. MasterCard Incorporated, along with MasterCard International Inc. and
MasterCard Europe S.p.r.l., is one of the three legal entities representing the
payment organisation of banks participating in the MasterCard payment card
scheme. The Initial Public Offering (IPO) of MasterCard Incorporated on the New
York Stock Exchange on 25 May 2006 did not affect the decisive elements to
qualify MasterCard's payment organisation as an association of undertakings and
its decisions setting the level of MIF as decisions of such association within
the meaning of Article 81(1) of the EC Treaty.

Does the Commission impose fines? What is the remedy?

No, the Commission decision does not impose fines on MasterCard, because
MasterCard notified the MIF arrangements to the Commission between 1992 and 1997
and therefore benefits from immunity.

Today's decision orders MasterCard to cease applying its current intra-EEA
fallback interchange fees for consumer credit and debit cards and to refrain
from adopting measures having a similar effect. This also implies that
MasterCard cannot apply its recently adopted SEPA/intra-Eurozone fallback
interchange fees to payment transactions within the Eurozone.

MasterCard was, however, granted a transition period of 6 months from
the date of notification of the decision, to comply with this order. This is an
exceptional measure. However, the Commission considered it adequate in view of
MasterCard's obligation to review its network rules to be able to comply with
the order. Moreover, MasterCard must inform clearing houses, settlement banks
and its member banks in Europe of the rule changes.

If, after the transition period, MasterCard does not fully comply with the
remedy, MasterCard will be ordered to pay a penalty payment per day until it
fully complies with the decision. The periodic penalty payment is 3.5% of
MasterCard's Inc. daily turnover of the preceding business year for each day of
non compliance.

Why did the Commission not yet decide about MasterCard's MIF in the
commercial cards segment?

The Commission did not yet take a final conclusion with respect to
MasterCard's commercial cards' MIF, as it has not yet finished its investigation
in this segment.

The MasterCard decision and SEPA

What does the MasterCard decision mean for SEPA?

The decision will support the creation of a Single Euro Payments Area (SEPA)
in the Eurozone by removing the danger of price increases due to the
MasterCard's MIF that could result from the ongoing migrations of domestic debit
cards to MasterCard's Maestro debit products. In most Benelux and Nordic
countries banks issue and acquire domestic debit cards at low cost, because
domestic card schemes operate without a MIF. Maestro, to the contrary,
carries a MIF.

The SEPA project must not lead to an artificial increase of merchant fees
across the Eurozone due to illegal pricing mechanisms such as MasterCard's MIF,
a MIF of which MasterCard did not prove that it creates efficiencies or benefits
to the consumers.

Some banks claim that they need a MIF to make appropriate investments in
SEPA – is this true?

Generally speaking, new investments are normally not financed through the
collective exercise of market power of competing undertakings. The payment cards
industry is no exception in this respect.

For instance, domestic schemes without a MIF introduced chip & PIN
technology very early on, more than ten years ago. MasterCard credit cards, to
the contrary, are only now being equipped with this chip technology, although
they carry the highest interchange fees. Domestic schemes without a MIF have
found ways to price cards in a competitive manner rather than hiding their cost
through a MIF that ultimately becomes part of the retail price. Cost
transparency has spurred efficiency and today the highest card usage per capita
exists precisely in those EEA Member States where card schemes operated without
a MIF for decades (Norway, Finland and Denmark).

Moreover, MasterCard and Visa are not the only options available to banks to
achieve SEPA compliance for their card portfolios. As the EPC pointed out, SEPA
can be achieved by several means under the SEPA Cards Framework (for more
information on SEPA Card Framework see http://www.europeanpaymentscouncil.eu).
Inter alia, existing schemes may join an alliance of domestic schemes.
They can also co-brand their cards with an international scheme rather than
replacing a domestic payment card entirely. The Commission, like the ECB, would
welcome the emergence of new pan-European schemes that would compete with
international schemes such as MasterCard and Visa. This will require a level
playing field between the potential newcomers and the incumbent schemes.

To the extent that proceeds from a MIF are dedicated to cover one-off
expenses for upgrading existing payment card schemes to SEPA standards this may
possibly be considered in evaluating the existence of objective efficiencies of
a MIF under Article 81 (3) EC.

The interchange fee has been a card industry standard, globally, for many
years. How can the industry survive without it?

Whether it is correct or not that interchange fees have been industry
standard for years, this has no bearing on the application of Article 81 of the
EC Treaty. A MIF does not become legal because it has been applied for many
years.

Moreover, this statement is factually wrong. Open card schemes such as
MasterCard's can operate without a MIF:

the Commission's Sector Inquiry into retail banking of 2005/2006 (see IP/07/114)
showed that in 22 of 25 EU Member States credit card issuing remains profitable
without interchange fees.

five domestic payment card systems in Europe (in The Netherlands, Denmark,
Norway, Finland and Luxembourg) have successfully operated without a MIF for
decades.

Can Europe win the "War on Cash" without MIF?

Yes. Domestic card schemes in Europe have been very successfully replacing
cash and cheques as payment means even though they operate without a MIF. Card
usage per capita in Europe is the highest in countries such as Norway, Finland,
Denmark or the Netherlands, where MasterCard is hardly present and where
domestic systems operate without a MIF or a MIF-like subsidy mechanism to the
benefit of card issuing banks. These countries have also been the first to
eliminate the use of cheques, a quite expensive payment instrument.

Is the possibility of a MIF excluded by the decision?

As explained below in relation also to the Visa 2002 decision, the Commission
does not from the outset exclude in the MasterCard decision the possibility that
a MIF may be indispensable to creating efficiencies that may outweigh the
restriction of competition.

Interchange fees after the MasterCard decision

Is there any "acceptable" MIF under Article 81 EC?

The Commission's decision addresses solely MasterCard's multilateral
intra-EEA fallback interchange fees for MasterCard and Maestro branded payment
cards. This decision does not cover interchange fees in general and it does not
prohibit interchange fees as such.

The Commission considers that MIF's must be examined under Articles 81(1) and
81(3) of the EC Treaty on a case by case basis. However, like any other
agreement that restricts competition, interchange fee agreements must fulfil the
four cumulative conditions of Article 81 (3) of the EC Treaty. This also holds
for an entirely new (that means materially different) MIF in the MasterCard
scheme should MasterCard choose to continue operating with this mechanism.
Otherwise, the MIF is illegal. If the criteria of Article 81(3) of the EC Treaty
are not met, the Commission would adopt a cease and desist order and, if
appropriate, impose fines. However, the Commission could not set a different
level of interchange fee. The Commission does not apply competition rules to
regulate the level of interchange fees.

Is a MIF the only possible "balancing mechanism" in an open payment card
scheme?

A revenue transfer between acquiring and issuing banks can take other forms
than a multilaterally pre-determined fee per card transaction that inevitably
sets a floor under the merchant fee. Economic literature has so far concentrated
its research on improving models on how to set an "optimal" MIF. There is hardly
any research so far on balancing mechanisms that do not effectively
pre-determine the price on either side of the scheme. This should change.

New pan-European card systems are needed. It would, however, be disastrous
if competition authorities took different approaches with respect to MIFs. What
does the Commission decision mean for the pending cases on domestic interchange
fees in various Member States?

The MasterCard decision brings much awaited clarity and guidance. However,
this does not mean that during the last years competition authorities have
applied Article 81 of the EC Treaty in an inconsistent manner; The Commission
has co-ordinated its policy and competition law enforcement with that of other
national competition authorities through the mechanisms of the European
Competition Network. In several Member States national competition authorities
carry out investigations on domestic interchange fees (such as in the UK). The
Polish Competition Authority has adopted a prohibition decision on MasterCard's
and Visa's domestic MIFs in December 2006. The Commission will continue to
co-operate closely with the relevant competition authorities in the Member
States in the framework of the European Competition Network.

What MIFs would the Commission accept as in conformity with Article 81
EC?

If a card scheme decides to in effect pre-determine a minimum fee merchants
must pay to acquiring banks through a MIF, this will lead to a restriction of
competition within the meaning of Article 81(1) unless, very exceptionally,
the scheme would not be viable without a MIF.

Where a MIF is restrictive under Article 81(1), the parties to the agreement
must demonstrate that despite the restrictive effects the conditions of
Article 81(3) of the EC Treaty are met, namely:

empirical proof that the MIF creates efficiencies that outweigh the
restriction of competition

consumers get a fair share of those benefits

there are no less restrictive means of achieving the efficiencies and

competition is not eliminated altogether.

In this respect, the
Commission will generally ascertain that the concrete model underlying a MIF is
based on realistic assumptions, that the model is plausibly implemented through
an objectively verifiable methodology and that the MIF indeed yields the
objective efficiencies on the market which are claimed by the parties. The
methodology underlying a MIF should be transparent to the final users of a
scheme. However, if a card scheme wishes to pre-determine the fees merchants pay
through a MIF, it must be aware that the burden of proof to demonstrate the
fulfilment of the four conditions under Article 81 (3) of the EC Treaty lies
upon the scheme and its members.

In the MasterCard case the Commission has in particular analysed a MIF
that aims at internalising network externalities to increase system output.
The Commission does not dispute in principle that such interchanges fees may
yield efficiencies which rest on the relative importance of network effects on
both sides of the markets. However, an imbalance of network externalities must
be carefully assessed on the basis of empirical evidence including both cost and
revenue data related to providing payment services that fall respectively on
issuing and acquiring, the willingness to pay of cardholders and merchants
(elasticities) and the competitive conditions on both sides of the scheme. Such
a MIF must therefore be based on a detailed, robust and compelling analysis that
relies in its assumptions and deductions on empirical data and facts.

It should be noted that a mere increase in a scheme's system output alone
without at the same time benefiting the scheme's users (that is cardholders and
merchants as well as their customers) cannot be considered as an objective
efficiency within the meaning of Article 81(3) of the EC Treaty. Any methodology
to set a MIF should therefore from the outset ensure that a fair share of the
benefits is granted to the final users of a card scheme.

Finally, there are indications that a new generation of MIFs is being
developed by some stakeholders in the industry which will be detached from the
concept of network externalities and that could more clearly contribute to
technical and economic progress. The Commission is open to review these MIFs.
Particular regard will be given to the possibility that these new MIFs
contribute to promoting more efficient payment means and help win a "war on
cash".

In reviewing any new MIFs the Commission would need to involve all
stakeholders, that is card schemes, banks, merchants and consumers as well
as the European Central Bank. National competition authorities in the European
Competition Network must be involved in this process to ensure a consistent
application of Article 81 (1) of the EC Treaty to MIFs across the EU.

The 2007 MasterCard decision and the 2002 Visa decision

To what extent is the Commission's line different in the MasterCard
decision than in the Visa decision of July 2002 and why?

In 2002 the Commission exempted Visa's MIF in the European Union for a
period of five years, subject to certain conditions. The exemption comes to an
end on 31 December 2007. Already in the Visa decision, the Commission considered
that a multilateral interchange fee restricts competition. However, the
Commission also stated that a MIF can in principle contribute to economic and
technical progress within the meaning of Article 81 (3) of the EC Treaty.

The MasterCard decision reflects the Commission's increased market knowledge
on the effects of multilateral interchange fees since the Visa decision in
2002.

As in the Visa decision, the Commission does not exclude the possibility that
a MIF could create efficiencies that would outweigh the restriction of
competition. A MIF may be compatible where it contributes to technical and
economic progress and sufficiently benefits consumers. This is a matter of
evidence. In the present proceedings, MasterCard was unable to provide this
evidence, as explained above.

Why did the Commission prohibit MasterCard's MIF but not Visa's
MIF?

The Commission sought to find an agreement with MasterCard on an acceptable
MIF. However, the modifications proposed by MasterCard were not appropriate to
bring its MIF in line with Article 81 (3) of the EC Treaty. The Commission
therefore continued its investigation.

Was Visa discriminated because it had reduced its MIF under the terms of
the VISA exemption decision while MasterCard maintained its MIF at the same
level during the last five years?

Both, Visa and MasterCard have claimed that they were discriminated because
of the Commission's decision on the Visa MIF in 2002. While MasterCard
complained that Visa benefited from legal certainty under an exemption decision,
Visa argued that MasterCard had been able to benefit from a higher MIF during
the whole period during which Visa had accepted to reduce its MIF under the
terms of the exemption decision. This situation is about to change as the Visa
exemption decision will expire on 31 December 2007.

Once the non-confidential version of the MasterCard decision is available, it
will provide guidance to the market. In the end, however, both Visa and
MasterCard must be aware that they are in no less privileged situation than all
other undertakings operating in Europe which are not addressees of a Commission
decision and have to ensure that they comply with EU competition law.